Another type of sales promotion for vehicles is to advertise the choice between a “Cash Purchase Price” or “0% Purchase Financing.” The tiny print at the bottom of a GM Canada full-page advertisement included the statement: “The GMAC purchase finance rates are not available with and are not calculated on the ‘Cash Purchase Price’ shown. The difference between the price for the GMAC purchase finance offer and the ‘Cash Purchase Price’ offer is deemed under provincial laws to be a cost of financing.” In other words, there are two prices for a vehicle—a lower price if you pay cash and a higher price if you want to take advantage of the “0% financing.” An additional disconcerting aspect of this type of promotion is that the higher price for the 0% financing is usually not quoted in the advertisement. Rather, it must be negotiated with the dealer.
Suppose the “Cash Purchase Price” of a car is $23,498, and the price that qualifies for full 0% financing (with 48 monthly payments) turns out to be $26,198. What effective interest rate will you be paying for the “0% financing?”